ALFI UCITS IV implementation project – KID Q&A Document

If the benchmark is implied then it must be described in the objectives and investment policy section of the KIDand it must be shown on the chart of past performance.If the fund is not an index-tracker but wishes to measure its performance against an index, it must include theindex on its chart of past performance and declare next to the chart that the fund is not a tracker.If the benchmark is used only to calculate performance fees and/or to provide general market context (i.e., theportfolio is constructed and managed without reference to it), then it must not be shown on the chart of pastperformance.Practitioners may wish to consider carefully how to approach this subject in the context of national marketing rules. Insome countries regulators might not permit a benchmark to be included in marketing material unless it is described inthe KID (the aim being to discourage fund promoters from changing the benchmark on their marketing material inorder to flatter their fund's performance).Q. If a fund is actively run and has no benchmark (i.e., the investment decisions are based entirely on thejudgement of the investment manager) must it be stated explicitly or may it be assumed to be the casebecause there is no benchmark and no reference made to a passive or tracking strategy?A. Art 7(1)(d) requires the KID to disclose "whether the UCITS allows for discretionary choices in regards to theparticular investments", and practitioners should comply. It is for the practitioner to decide how to do so. A well-writtendescription of the UCITS investment strategy could achieve this without an explicit statement.Art 7(2)(e)Q. What type of fund trading strategies are likely to qualify under this article as incurring transaction coststhat have a material effect on investment returns?A. There is nothing in the EU Regulation 583/2010 or CESR/09/949 (general guidelines on the KID) or CESR/10-674(guidelines on the calculation of ongoing charges) to inform an answer to this question. Practitioners may wish toconsider making such a disclosure for UCITS that employ quantitative strategies, which involve a higher volume ofsecurities trading than might be expected for other forms of active management. They similarly may wish to considermaking such a disclosure for UCITS that invest substantially in markets where securities transaction charges arerelatively expensive. We do not think that it is necessary under this article to take account of transaction costs thatarise because of shareholder capital activity.Q. What words could be used to satisfy the provisions of Art 7(2)(e), "where the impact of portfolio transactioncosts on returns is likely to be material due to the strategy adopted by the UCITS, a statement that this is thecase, making it also clear that portfolio transaction costs are paid from the assets of the fund in addition tothe charges set out in Section 3 of this Chapter"?A. We think that the following text would be suitable: "The portfolio transaction costs of this fund's investment strategyare a material component of its performance. Portfolio transaction costs are paid from the assets of the fund. They areadditional to the charges set out in the Charges section."With respect to the related statement on the performance chart (Arts 15(5) and 15(5)(b), "The bar chart layout shall besupplemented by statements which appear prominently and which … indicate briefly which charges and fees havebeen included or excluded from the calculation of past performance."), we think that the following text would besuitable: "The chart shows the fund's performance after all charges, including portfolio transaction costs, have beenpaid."Art 7(2)(f)Q. Information on the minimum recommended term for holding units in the fund seems to belong more to thesection Risk & Reward than to the section Objectives and Investment Policy. Can I move it to the section Risk& Reward?A. No. You must put information in the sections strictly in accordance with the EU Regulation 583/2010. This isintended to ensure the comparability of KIDs issued by different promoters.ALFI KID Q&A, Issue 1314, 11 April25 September 2012 Page 14